Austria's Biggest Bank Bailout Wasn't Needed, Court Says

Austria’s most expensive bank rescue, the nationalization of Kommunalkredit Austria AG in 2008, could have been avoided, the nation’s audit court told lawmakers in a review of the deal.

The Finance Ministry didn’t properly analyze whether the impact of the Kommunalkredit’s collapse on the industry and broader economy justified the bailout, the Rechnungshof audit court, a parliament-appointed body supervising the government’s spending, said in a report today. A bankruptcy in 2008 wouldn’t have caused the insolvency of its owner, Oesterreichische Volksbanken AG (VBPS), it said.

“No comprehensible considerations by the Federal Ministry of Finance about possible alternatives are documented,” the court in Vienna said. “According to the files presented, a possible insolvency of Kommunalkredit wouldn’t have put the existence of Volksbanken AG at risk.”

Austria lost its AAA credit rating at Standard & Poor’s in January because of bank bailout risks. Kommunalkredit, a lender to local government that strayed into more risky areas of business such as writing default swaps on Greece, and KA Finanz AG, which took on the bank’s riskier assets, have cost Austria more than 2 billion euros ($2.6 billion) since 2008, the most among banks that received state support.

The Finance Ministry stands by its decision, spokeswoman Daniela Kinz said in an e-mailed statement today. The bailout was needed to guarantee financial stability and safeguard Austria’s credit rating, she said.

Financial Backing

While Kommunalkredit, which the government plans to sell, won’t need more state aid, KA Finanz will need financial support for several more years, the court said.

Volksbanken, which co-owned Kommunalkredit with Franco- Belgian lender Dexia SA (DEXB), was partly nationalized earlier this year. The Austrian government took a 43 percent stake after writing down by 700 million euros the extra aid Volksbanken had received in 2009, following the Kommunalkredit nationalization.

The cost of nationalizing Kommunalkredit may yet be surpassed by costs for Hypo Alpe-Adria-Bank International AG, which was taken over by the state and needs to top up its capital before the end of the year.

Moody’s Investors Service cut the outlook on Austria’s government debt to “negative” in February, citing risks to the country’s finances of rescuing banks. Moody’s may lower the country’s AAA rating should its lenders require a second bailout, it said.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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